Archive for June, 2011

The Road to Serfdom: Chapter 5

“This is the fundamental fact on which the whole philosophy of individualism is based. It does not assume, as is often asserted, that man is egoistic or selfish or ought to be. It merely starts from the indisputable fact that the limits of our powers of imagination make it impossible to include in our scale of values more than a sector of the needs of the whole society, and that, since, strictly speaking, scales of value can exist only in individual minds, nothing but partial scales of values exist – scales which are inevitably different and often inconsistent with each other. It is this recognition of the individual as the ultimate judge of his ends, the belief that as far as possible his own views ought to govern his actions, that forms the essence of the individualist position.” –pg 102

Planning and Democracy

The main problem with social planning is that it is often difficult to define what is meant by the common good and using the state to achieve a set of ordered preferences assumes that the desired ends of millions of people can be measured as a single aggregated goal. In reality the welfare of a population depends on an infinite variety of ends that cannot be expressed as a single goal but as a multitude of ends each ranked differently by the attention and interest that each individual pays to any particular social problem. For the state to direct its action towards a common goal it must either have agreement between the ordered preferences of individuals or it must be willing to ignore the conflict that exists between the preferences of individuals that are not identically ordered and force the ordered preferences of those that control the state onto those that disagree with the preferences of the state.

Since it is impossible for any individual to be aware of the urgency of more than a limited number of needs it will always be true that the individual will only be concerned with a small fraction of the needs of all those within society that could benefit from state action. The subjective view of the total need within society ensures that each individual will rank their preferences for the common good differently and therefore it becomes very unlikely that these subjective preferences will find common agreement under all but the most pressing threats facing the welfare of society. If each of the possible subjective ends that benefit the whole of society are competing for a scarce amount of resources then it will not be likely that a majority will be able to form the consensus required to set the ordered preferences of the state.

The inability for individuals in disagreement to form a cohesive plan for the state suggests that the only way for the government to form a consensus is to increase its scope until each individual has some of their preferences implemented through centralized planning. This creates a natural oligopoly between the ends that can gain the most national support and force the ends of the minority to be subjugated by the will of the majority. The oligopoly of majority opinion can then implement the forced support it requires from the minority whereby each group within the oligopoly can gain more than its fair share of support even if the individual groups within the oligopoly have ends which are in direct opposition to each other. Whereas these groups would have to face the trade-offs between their competing ends under a voluntary system, they are now able to subsidize their disagreed upon ends by forcing the cost onto the minority who now loses out on the ability to seek out their own ends in their entirety.

When an oligopoly (or monopoly) on planning cannot be formed then the democratic body is limited in its ability to take planned action as those in the governing body attempt to convince each other of their views instead of implementing a coherent plan. While the people agree that a plan must be implemented they are unable to agree on any particular plan and an increase in the dissatisfaction with democratic institutions will lead to an increase in the support for the various roles of the state to be delegated to a body of experts. This relinquishing of power from democratic control only deals with the symptoms of frustration and not with the true cause at the root of the conflict. To agree to planning without agreement to the particular plan leads to the need for there to a small group of people who have the ability to dictate the direction of the plan.

As the preferred plans of these groups come towards more agreement, the pressure to form an ever increasing concentration of power ceases. The final outcome will rest not only on the degree of agreement between these groups but on the economic costs placed on society by the monopolistic nature of these groups. If there is a significant decrease in the scarce resources that these groups share between their ends then there will be significant pressure placed on the tenuous agreement that these bodies have reached. As Hayek points out, the example of Germany is easily understood since Hitler did not destroy democracy but was able to take advantage of a failed democracy facing extreme economic hardship. Although many Germans detested Hitler, he was seen as the only man strong enough to get things done.

Liberty and Democracy

The success of the modern democracies is based off their allowance for much of the decision making process to be left in the hands of private individuals. The ability to form collective action when preferences align, and leave collective action when deliberation fails, allows for a wider satisfaction of the subjective preferences of individuals. This not only increases the liberty of each individual but increases the chance that the issues for which the democratic body is responsible for will be agreed upon. As we see in modern democracies, the planning that occurs is often in the form of assisting those whose economic limitations prevent them from attaining their individual plans.

If we believe Hayek’s argument then we can see that democracy can only function within the capitalist system where individuals have free disposal over private property. Hayek goes so far as to say that “when it becomes dominated by a collectivist creed, democracy will inevitable destroy itself.” Strong words considering that many of the modern democracies have experienced and survived the challenges that Hayek says would stress the democratic process. What could be the possible causes that led Hayek’s theory to fail to predict the resiliency of the modern democracies? The answer is that the belief in liberty takes pressure off of the democratic process, as stated above, and the increase in the wealth over which the decision making process is made allows for a greater number of demands to be satisfied.

As I stated in an earlier post, one of the possible reasons is that of the reliance of the democratic process on government stimulus. We can now see how deficit financing is able to postpone the process that Hayek discusses in this chapter and allows those in society to value both socialist and democratic views. The disagreement that leads to the implementation of centralized bodies with dictatorial control may not be very evident when deficit financing is able to satisfy all the ends that each group within society demands. The costs of conflict are then subsidized by future taxpayers who bear the cost simply because they are not represented by the democratic process that present voters participate in.

When a democratic body is not able to agree on what programs need to be sacrificed to balance the budget it incentivizes politicians to garner a majority of votes by providing services to the largest number of voting groups through deficit financing. If a democratic body is unable to balance its budget in the present it is unlikely that it will be able to balance its budget in the future and will only be willing to balance its budget when there is an immediate threat to its bond markets. As we can see in many modern democracies like Greece, when the demand for a county’s bonds dries up the conflict that the deficit was obscuring becomes immediately apparent.

At this point it becomes impossible for a democratic body to regain control on its own since many of its citizens have left the democratic process entirely as they engage in violent acts against the governing body. We have seen many recent attempts to quell this unacceptable outcome through third party bailouts, dissolution of the state, and violent suppression of the protestors. We are at a point in history where we might see many natural experiments for Hayek’s theory, as democratic bodies attempt to agree on the impossible task of determining who will take the cuts required to balance the budget. The pressure this will place on the democratic process will test the solvency of the majority of modern democracies over the next several years.


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The Road to Serfdom: Chapter 4

“The illusion of the specialist that in a planned society he would secure more attention to the objectives for which he cares most is a more general phenomenon than the term “specialist” at first suggests. In our predilections and interests we are all in some measure specialists. And we all think that our personal order of values is not merely personal but that in a free discussion among rational people we would convince the others that ours is the right one. All know that their aim can be fully achieved only by planning – and they all want planning for that reason. But, of course, the adoption of the social planning for which they clamor can only bring out the concealed conflict between their aims.” –pg 98

The “Inevitability” of Planning

            Hayek begins this chapter with a critique of two slightly outdated arguments the socialists of his day used to justify their belief in the inevitability of planning. Both arguments may have been common back in Hayek’s time but they show their age mostly because both arguments revolve around the advancement of technology. In today’s age of advanced technology and constant innovation it is easy for us to forget how little effect technological change had on the everyday lives of the contemporary readers of Hayek’s arguments. It is highly unlikely that anyone educated in modern economics would be caught using either of these arguments but within Hayek’s critique the reader is introduced to the coordinating role that competition and the price system plays and therefore it would be useful to take a look at Hayek’s response.

            The first argument, and the less believable of the two, is that the large players within an industry that can afford to invest in new technology are able to develop economies of scale that are not available to their less technologically advanced counterparts. This allows the technologically advanced companies to produce goods at a cheaper price and put their competitors out of business thereby achieving a monopoly within an industry. At this point the business will begin to raise their prices and take whatever monopolistic rents they can and it will be required by the state to take control of the industrial monopoly in the name of protecting consumers. If this argument is true then the inevitability of technological progress is the inevitability of state planning of industries and cannot be blamed on those who implement the planned economy but must be blamed on the private monopolies that arise in a competitive economy.

            While we know now that technological progress usually breeds competition, there are similar processes at work within our society as those that brought about the type of planning that Hayek was discussing. Hayek’s response to the argument of his day was that these monopolies did not gain their monopolistic status through technological advance but through direct and indirect support from the state, either through direct monetary subsidy or through the indirect subsidy gained by the state placing regulatory burdens onto the monopolist’s competitors. The principle at work here is that if the supporters of planning do not have the knowledge of the monopolistic effects of the state then the government can intervene in a problem that it has itself created. If costs placed on consumers by special interest groups can be blamed on a third party then the special interest groups can increase the ability of the state to further their agenda in response to the negative effects that were created by their agenda in the first place.

            The second argument of the socialists is that technological advances within a society create a complexity within that society that no individual is able to fully comprehend. Without the ability to obtain a coherent picture of the complete economic process it becomes indispensable that individuals have a central agency responsible for coordinating social life to prevent society from dissolving into chaos. Therefore, it will be required that the state takes the role of economic planner and coordinates the needs that the various industries require in satisfying the needs of consumers.

            In response Hayek lays out the most important role played by competition and the price system; as a method for collecting disparate information within the economic system and coordinating the desires of the competing interests of consumers and producers. Contrary to the argument of the socialists, the more complex a society becomes the greater the need for the economic system to be decentralized because no central authority is going to be able analyze the vast amount of data within the system, most of which they do not have access to. Society is serviced best when the role of collecting the demands of consumers and satisfying those demands is left to the group of people that is best able to accomplish this goal. The only way to objectively discover this group of people is through the free competition that naturally takes place within the market system. Not only does this process produce the best methods of production, the ability of consumers to withdraw their support for marginal producers ensures that the monopolistic tendencies of producers are kept in check.

The Limits of Expertise

            Hayek ends the chapter with a discussion of the great appeal that planning has for the experts within society. When a group of individuals have reached the pinnacle of their field not only are they capable of seeing the next required innovation but they are also able to have a full appreciation of the limits set on them by the scarcity of their resources. The next break through can seem like it is just over the horizon if only more people would support their efforts. It can be very tempting to use the coercion of the state to force others to take on the risk required to invest in untested methods under the justification that those forced would support the investment if they were able to fully appreciate the benefits of the desired innovation.

            What experts often fail to grasp is that their drive to excel in their preferred field has led them to neglect their knowledge of other fields. While the depth of an expert’s knowledge in their particular field exceeds that of the average person, the breadth of their knowledge is not necessarily greater than that of the average person. This leads the expert to overestimate the benefits that innovations in their field will have and, more importantly, underestimate the opportunity cost of forcibly redistributing wealth from other areas of study. While those that support government led research find themselves naturally drawn to collude against the consumer, they often have little understanding of how their forced distribution prevents consumers from benefitting from any innovations they may discover.

            It is unfortunate that the belief in the necessity of centrally planned research draws the most intellectually capable members of society within the paradigm of supporting the state because it leaves the average citizen with the impression that innovation would not exist if it were not for state support for research. Those that are the most intelligent and articulate within society are then put into the service of the state and will thereafter be incentivized to defend the programs of the state. This process then selectively biases discourse within society by creating a special interest group out of the intellectual class that would otherwise be able to point out the negative consequences of state coercion. In addition it removes those intellectuals from the pursuit of finding innovative and voluntary solutions to the problems of society which could lead to eventual removal of all coercive solutions.

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The Road to Serfdom: Chapter 3

“The dispute between the modern planners and their opponents is, therefore, not a dispute on whether we ought to choose intelligently between the various possible organizations of society; it is not a dispute on whether we ought to employ foresight and systematic thinking in planning our common affairs. It is a dispute about what is the best way of so doing. The question is whether for this purpose it is better that the holder of coercive power should confine himself in general to creating conditions under which knowledge and initiative of individuals are given the best scope so that they can plan most successfully; or whether a rational utilization of our resources requires central direction and organization of all our activities according to some consciously constructed blueprint.” –pg 85

 Individualism and Collectivism

                 In this chapter Hayek carefully lays out the scope of the debate and begins to discuss the general outline of how a socialist society can end up on the road to serfdom. As seen above, it is important to define what is meant by the term planning. The debate revolves around the fact that central planning is coercive planning and the more coercive the central planner the less room there is for individual planning. To maximize the amount of freedom within individual planning, Hayek argues that it is the role of the government to construct the conditions necessary to facilitate the planning of individuals. This not only includes a central legal authority but also allows for the production of public goods that cannot be properly calculated for by the system of private property and prices.

                The problems begin to arise for the socialists because the means of achieving their ends are the same means that are required for any preferred distribution of wealth. The danger with striving towards the socialist ends, regardless of the means, is that the success of the project cannot be determined until after the costs of the project have already accrued. Therefore, those who wish to redistribute wealth along lines socialists would consider unjust only need to create methods wherein the redistribution is diverted to unjust ends while making the claim that the program will meet the desired ends of the socialists. As long as the ends satisfy the socialists to some degree, support can be gained from the socialist movement for any redistribution of wealth, even those that would be considered unjust. Once the wealth has been redistributed to unjust ends it is often too late to rectify this distribution and without competition between methods there is no objective way to calculate the costs of possible alternative programs.

                It is the belief that the costs of coercive central planning outweigh the benefits that leads Hayek to support a system of laissez-faire. The threat of special interest groups hijacking the socialist process imposes an initial cost on the socialist project regardless of whether or not the socialists are capable of weeding out those people that are attempting to gain support for an unjust redistribution of wealth. The research required in making this determination and the need to educate those in a position of possibly supporting an unjust program imposes large costs, in terms of time spent, on the socialists. Since the socialists do not receive any monetary compensation when they succeed at making this determination and the special interest groups receive monetary compensation when the socialists fail, there is a huge disparity in the incentives faced by those individuals who are attempting to make this process a success or failure.

                The expected value the socialists receive from the methods of coercive central planning can simply be calculated as the net gain to social justice minus the costs imposed on them by special interest groups and weighted by the percentage chance of the socialist’s success in preventing their programs from being hijacked by special interest groups. The support of a system of laissez-faire can rest entirely on the outcome of this calculation wherein a negative value means the system of laissez-faire leads to greater social justice even if we assume there is no private charity supporting programs of social justice.

 The First Step on the Road to Serfdom

                We can further understand the costs imposed by special interest groups once we understand that the costs imposed onto socialists are often imposed by other socialist groups. What Hayek refers to as socialists of the Left and Right are often united in their support of the coercive means of organizing society but, ironically, have opposing ends whose costs they seek to impose onto each other. These two groups are united behind their anti-competitive mentality but seek the implementation of completely different socialist programs. While the Left socialists support the centrally planned redistribution of wealth towards the poor, the Right socialists support the centrally planned redistribution of wealth to the business and working class individuals within society. The Left supports centrally planned education and health care services, while the Right support a centrally planned monetary supply and the limited liability of corporations.

                This union against competition is the first step towards the road to serfdom and can lead to the organization of a society’s industries along syndicalist or “corporative” structures which attempt to eliminate competition but leave the planning in the hands of the independent monopolies of each industry. The rents acquired by these monopolies are then split between the organized labour and business groups that support each of these industrial monopolies. These monopolies impose costs onto consumers by appealing to the socialist values of the average citizen while the failure of the citizenry to properly calculate these costs leads to an ever increasing financial burden upon the productive class of consumers and tax payers that pay for the costs of these programs. When these monopolies become too overbearing the only way to move back to a state of competition is for the citizens to vote in a government that is willing to return full control of the monopolized industries to the state. This position leaves society at a precarious point where they can move towards a freer state of competition or a state of complete central control depending on the motives of those in power.

Hayek’s Hypocrisy

                The problem with this chapter, and the classical liberals take on laissez-faire in general, is that Hayek can spend the opening paragraphs criticizing socialists for using monopolistic solutions to social problems and then later openly call for the institutionalization of a monopolized legal service simply on the basis that he is incapable of creating voluntary solutions to the problem of public legal goods. When a voluntary solution cannot be found to the problem of public goods implementing a monopolistic solution still carries the problems of monopolies even if there is no alternative solution. The very outcomes Hayek so clearly lays out in the beginning of the chapter are then completely incomprehensible to him in the latter half of the chapter when he complains about the monopolization of legal services slowly eroding the legal framework of his preferred economic structure.

                Who was it that said that focusing on the ends without analyzing the means will lead you to form groups with those that support your preferred means but with the intention of undermining your ends? It was Hayek from the first half of the chapter! Maybe someone should introduce him to the Hayek of the second half of the chapter. It is disheartening to see a writer that is usually so clear and precise in his thinking get so muddled up and contradictory within the space of five pages.

                But we should not completely fault Hayek, monopolized legal services has been a core exception to laissez-faire philosophy for a long time and is not something that has been adequately solved by anyone. The problem to having an exception to a laissez-faire philosophy is that it opens up the door to anyone and everyone who might have an exception. Those in the laissez-faire camp even have one of the weakest excuses; they simply cannot think of any voluntary solutions to the problem of providing legal services as if they have searched the entirety of the solution space. Socialists on the other hand use the power of the state to enrich the lives of the poor, why shouldn’t their exceptions take precedent?

                Until those that support free markets solve the problem of free market legal services they will never be able to live in a free market society because their lack of principles only gives others the freedom to circumvent principles when it suits their needs. The discussion of free market legal services is far beyond the scope of this book but I think it is important to point out the unprincipled nature of the laissez-faire argument as we go forward with discussing the ideas of The Road to Serfdom.

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